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2020 Changes to IRA Regulations – CARES Act

By Ken Vander Kooi, CFP®April 13, 2020Financial Planning

The recently passed $2 trillion relief bill (CARES Act) contains not only provisions related to stimulus payments and small business relief, but also includes several provisions related to owners of IRA accounts.  Below are a couple of those provisions which might be of interest to clients who are already retired as well as those approaching retirement.

Required Minimum Distributions suspended for 2020

Due to provisions in the CARES Act, minimum distributions that would have been required in 2020 have been suspended.  This means that if you are over 72 years old or already subject to RMD requirements (turned 70 ½ before 2020) there is not a distribution required from your IRA for this year.

This may come as a relief to many IRA account holders as required distributions are based on the ending value of the IRA account on December 31 of the previous year.  As it stands today, those values for 2019 are likely materially higher than the market value of accounts today due to the COVID-19 crisis.  Thus without the suspension of required distributions IRA owners could be forced to take relatively larger distributions from accounts after market values have declined significantly.  With the requirement removed, distributions for 2020 can be based on client’s cash needs rather than satisfying IRS requirements.

2020 Required Minimum Distributions already taken

The changes to distribution requirements begs the question, what does this mean for IRA owners who have already taken their required minimum distribution for 2020?  Unfortunately, at this point the relief legislation does not include any specific provisions for rolling distributions back into IRA accounts if already taken to satisfy IRS requirements.  While the IRS or future legislation may provide further guidance on this issue, for the moment distribution already taken can only be rolled back into the IRA account if 2 conditions are satisfied.

First, as required minimum distributions are suspended the funds distributed could be redeposited to an IRA account so long as the funds are put back within 60 days of the original distribution.  Please note that this could preclude clients from rolling back their distributions if the funds were distributed early in the year (more than 60 days ago).

Second, there is an IRS rule that limits direct rollovers (i.e. redepositing distributed funds) to once per year.  It should be noted that this rule is based on a rolling 365 day timeline, not a calendar year.  For example if an IRA owner had completed a direct rollover on April 1, 2019 they would not be eligible for another direct rollover until April 2, 2020.

Deadline for making 2019 IRA contributions extended

The last day for filing 2019 tax returns has been extended to July 15 from the usual April 15 deadline as part of the recently enacted CARES Act.  As such, the deadline for making contributions to your IRA account for the 2019 tax year has also been extended from April 15 to July 15.  Contribution limits have not been altered by the recent legislation, remaining at $6,000 for individuals under age 50 ($7,000 for those 50 or older) so long as one has taxable income at least equal to the amount contributed.

In addition, the extended deadline applies to 2019 Health Savings Account (HSA) and Coverdell Education Savings Account (ESA) contributions.

In Conclusion

The CARES Act of 2020 has several provisions relating to owners of IRA and Roth IRA accounts.  The extension of contribution deadlines and the suspension of required minimum distributions are two major changes affecting retirement accounts this year.  If you have any questions on these changes or other items relating to your investment accounts please contact us at 831-429-6513.

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